Funds passing through a correspondent bank account in New York can create personal jurisdiction over the funds’ recipient, ruled the United States District Court for the Southern District of New York. In Official Committee of Unsecured Creditors of Arcapita Bank B.S.C. v. Bahrain Islamic Bank, the court found personal jurisdiction over foreign banks because of those banks’ selection and use of correspondent bank accounts in New York.
The decision arises out of an appeal involving Arcapita Bank BSC, a bank headquartered in Bahrain. Arcapita commenced a chapter 11 case in the Bankruptcy Court for the Southern District of New York in March 2012 and confirmed a reorganization plan in June 2013. The bankruptcy court subsequently granted the creditors’ committee appointed in Arcapita’s case standing and the authority to pursue causes of action belonging to the estate.
Pursuant to this authority, the committee commenced adversary proceedings against two Bahraini banks – Bahrain Islamic Bank (“BisB”) and Tadhamon Capital B.S.C. — seeking to avoid as preferential transfers certain transfers of funds by Arcapita that were received by the banks. The transfers at issue were made in connection with investments that Arcapita made through each of the banks. In 2012, before its chapter 11 filing, Arcapita executed agreements with each bank to purchase non-U.S. securities on Arcapita’s behalf. Upon maturity, the banks would buy the securities back from Arcapita. Pursuant to the terms of the investment transactions, Arcapita transferred U.S. dollars to each of the banks through correspondent bank accounts in New York. BisB and Tadhamon had no contacts with the U.S. other than the transfers of U.S. currency through the New York correspondent banks.
The applicable maturity dates for the transactions occurred shortly after Arcapita’s bankruptcy filing. BisB and Tadhamon each set off all or nearly all of the funds each bank was to pay Arcapita against the amounts owed by Arcapita to each of them.
After the committee commenced its adversary proceedings against BisB and Tadhamon, the banks filed motions to dismiss, asserting, among other arguments, that the bankruptcy court lacked personal jurisdiction over them. The bankruptcy court agreed, ruling that the single use of a correspondent bank account in New York by each of the banks as a “transitory step” for the transfers did not demonstrate sufficient contact with the United States for the court to exercise personal jurisdiction over the banks. Thus, the bankruptcy court dismissed the adversary proceedings. The district court reversed.
Resolution of the appeal turned on the district court’s application of a 2012 New York Court of Appeals case,Licci, where the Second Circuit certified to the New York Court of Appeals the question whether a foreign bank’s maintenance of a correspondent bank account at a financial institution in New York, and use of that account repeatedly to effect wire transfers on behalf of a foreign client, constitutes the “transaction of business” in New York under New York’s long-arm statute.
The district court interpreted Licci as standing for the proposition that the use of a New York correspondent bank account, even if the defendant has no other contacts with New York, can be a basis to assert personal jurisdiction so long as “the use was purposeful and not coincidental or adventitious.”
In Arcapita’s case, the district court reasoned that a basis to exercise personal jurisdiction over BisB and Tadhamon existed because their use of correspondent bank accounts in New York was purposeful. The banks set the terms of the transactions with Arcapita, and, therefore, designated New York correspondent bank accounts (rather than accounts located elsewhere in the world) to receive U.S. dollars from Arcapita. As the district court emphasized, the banks’ selection of the New York correspondent bank accounts that received the funds originated with the banks and they actively directed the funds at issue into those accounts.
The district court, however, made clear that “mere maintenance” of a correspondent account in the United States is not sufficient to support personal jurisdiction over the account holder in connection with any controversy that might arise in the United States. Had the facts been different – that is, had Arcapita selected the United States currency and the New York correspondent banks – there would not have been personal jurisdiction over BisB and Tadhamon because the foreign banks’ contacts with New York would have been “adventitious.”
The opinion also noted that other requirements for jurisdiction were met because the allegedly preferential transfers at issue in the adversary proceedings arose from the foreign banks’ “purposeful use of correspondent bank accounts in New York.” In sum, by directing the transfer of millions of dollars through New York’s banking system, BisB and Tadhamon should have foreseen being “haled into court” in the U.S. for a cause of action related to and arising from those transfers.
The fact that the banks’ contacts with New York were not passive but, rather, “active and volitional,” provided the bankruptcy court with a sufficient basis for asserting personal jurisdiction over the banks. The district court noted that if the banks wished to avoid being subject to jurisdiction in the United States in connection with their transactions, they could have designated non-U.S. accounts to receive the funds. This decision should give guidance about factors courts evaluate to determine whether transactions between non-U.S. financial institutions, the effects of which are felt overseas, may nonetheless be subject to litigation in a United States court.